What is the outlook for Gold over the next six months?
Gold 6-month Outlook (Q3 2019 – Q1 2020)
Over the next few months, Phillip Futures dealer Lim Jin Ru expects gold demand to go up. She explains why.
Central banks are on gold-buying sprees and global economic conditions are worsening. A prolonged Sino-US trade dispute will generate rallies and sell-offs, but the extent of price movement depends largely on the severity of the situation.
Loosening monetary policy is likely to sustain support for the demand for gold.
Turbulence
The past 8 months’ economic events, from the Sino-US trade disputes to a delayed Brexit, have put gold price on a roller coaster ride. Sino-US relations have warmed and cooled, while tit-for-tat tariff retaliations between the two largest nations are still ongoing. Central banks are increasingly loosening monetary policy as global headwinds doubled down. The equity market peaked and tumbled amidst overwhelming uncertainty in the global markets.
As a result of rising geopolitical tensions and a global economic slump, the price of gold and other precious metals have been rising. In the short run, prices are likely driven by headlines, which has been the case for the past 2 months. Fundamentals are likely less applicable in the short-run, but will still play a major role in the medium to long run.
Figure 1: Bloomberg Data
Fed: Hawk or Bear?
Even though markets have been on a bullish streak, gold prices have surged in the past few months, driven largely by dovish central banks and heightening uncertainty.
After four consecutive rate hikes in 2018, the Federal Reserve had a complete shift in their stance. The formerly hawkish Fed announced a need for “patience”, causing confusion and panic in the market as investors started digesting the Fed’s actions.
The Fed has been increasingly dovish as the global economic slowdown coupled with trade war escalations started hitting the U.S economy. Even though there has been a slew of positive economic data releases, it remains unlikely that the key economic goal to maintain inflation at 2% will be attained unless further rate cuts are implemented.
To overcome falling economic growth and stubbornly low inflation rates, the Fed will likely have to adopt an increasingly bearish stance. The Fed has a strong case for a more accommodative policy and is expected to cut rates during the Federal Open Market Committee (FOMC) meeting, held on 17 and 18 of September.
Central Bank Demand
The Central Bank’s buying spree are not likely to end soon. Based on information released by the World Gold Council (WGC), gold buying in the first half of 2019 surged to a new high, totalling 374.1 tons. Demand has mainly been driven by emerging markets like India, China, and Russia. People’s Bank of China disclosed that China’s gold reserves had increased to 87.27 billion by the end of June. This is a mere 2.7% of its 3.12 trillion foreign reserve assets. Going forward, China has plenty of room to grow its gold allocation, as the country is seeking to diversify away from the dollar. We expect strong support in gold prices as demand will be propped up for at least the next few years by the central banks.
Short-Term Outlook
In the next few months, prices will be heavily influenced by headlines. Better-than-expected economic data coupled with officials from both China and the US agreeing to restart talks over trade disputes have led to a run for riskier assets. Gold experienced its largest decline of approximately 2.2% in 3 years on 6 September as safe-haven demand waned.
Investment demand is likely to be swayed by any positive or negative news on the trade talks. The trade conflict cannot be resolved until major differences are reconciled and compromises are made from both parties. The situation has swung between both extreme ends, with officials stating that “a trade agreement is in sight” to a massive fall out between the two parties. At present, any “progress” should be taken with a pinch of salt.
Figure 2: Gold Prices (Bloomberg)
With the strong demand from central banks, prices are unlikely to fall below the support level of 1413. We may see a retracement past the resistance level of 1561 should there be an unexpected surge of bad news. Within the next 6 months, there should only be some selling pressure if the precious metal dips below 1500.
(By Phillip Futures)
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